Reservation Price as a Range: An Incentive-Compatible Measurement Approach

Abstract

Drawing from the literature on buyers' uncertainty in preference and product knowledge, the authors suggest and empirically test the proposition that a consumer's reservation price for a product is more meaningfully and accurately represented as a range than as a single point. Given this conceptualization, they propose an approach for incentive-compatible elicitation of a consumer's reservation price range (ICERANGE) that builds on Becker, DeGroot, and Marschak's (1964) point-of-purchase method. Two empirical applications of the approach provide an assessment of its practicality and its predictive performance relative to current methodologies for reservation price elicitation. The results demonstrate that the proposed method significantly outperforms the benchmark approaches in terms of predictive validity and yields valuable incremental information about uncertainty in product valuation.